| Nature of Business and Summary of Significant Accounting Policies | 1. Nature of Business and Summary of Significant Accounting
Policies
Organization
ZS Pharma, Inc. is a biopharmaceutical company focused on the
development and commercialization of highly selective, non-absorbed
drugs to treat renal, cardiovascular, liver and metabolic diseases.
Our proprietary zirconium silicate technology allows us to create
highly selective ion traps that can reduce toxic levels of specific
electrolytes without disturbing the balance of other electrolytes.
Our lead product candidate, sodium zirconium cyclosilicate, (or
ZS-9), completed Phase III development for the treatment of
hyperkalemia, a life-threatening condition in which elevated levels
of potassium increase the risk of muscle dysfunction, including
cardiac arrhythmias and sudden cardiac death. We submitted our New
Drug Application, or NDA, in the United States on May 26,
2015, and we have been informed by the FDA that our Prescription
Drug User Fee Act (PDUFA) goal date is May 26, 2016. We expect
to submit our Marketing Authorization Application, or MAA, in
Europe in the fourth quarter of 2015 with the goal of obtaining
approval for the treatment of hyperkalemia in Europe.
On June 17, 2014, our registration statement on Form S-1 (File
No. 333-195961) relating to our initial public offering (IPO)
of our common stock was declared effective by the Securities and
Exchange Commission (SEC). Our shares began trading on The NASDAQ
Global Select Market on June 18, 2014. The public offering
price of the shares sold in the offering was $18.00 per share. The
IPO closed on June 23, 2014 and included 6,836,111 shares of
common stock, which included 891,667 shares of common stock issued
pursuant to the option granted to the underwriters to purchase
additional shares. We received total proceeds from the offering of
$114.4 million, net of underwriting discounts and commissions of
$8.6 million. After deducting offering expenses of approximately
$2.3 million, net proceeds were approximately $112.1 million. Upon
the closing of the IPO, all shares of convertible preferred stock
then outstanding converted into 11,979,479 shares of common
stock.
Upon the effectiveness of the Amended and Restated Certificate of
Incorporation of the Company on June 23, 2014, the number of
shares of capital stock the Company is authorized to issue was
increased to 255,000,000 shares, of which 250,000,000 shares are
common stock and 5,000,000 shares are preferred stock. Both the
common stock and preferred stock have a par value of $0.001 per
share. There were no shares of preferred stock outstanding at
September 30, 2015 or 2014.
On March 30, 2015, we closed our follow-on public offering of
4,015,939 shares of our common stock. The public offering price of
the shares sold in the offering was $46.25 per share. The total
proceeds from the offering to us, net of underwriting discounts and
commissions of approximately $11.1 million, were approximately
$174.6 million. After deducting offering expenses of approximately
$1.0 million, our net proceeds were approximately $173.7
million.
Basis of Presentation
The accompanying financial statements have been prepared in
accordance with United States generally accepted accounting
principles (U.S. GAAP) for interim financial information and in
accordance with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
The interim condensed balance sheet as of September 30, 2015,
and the interim condensed statements of operations for the three
and nine months ended September 30, 2015 and 2014, and the
interim condensed statements of cash flows for the nine months
ended September 30, 2015 and 2014, are unaudited. The
unaudited interim condensed financial statements have been prepared
on the same basis as the annual financial statements, and in the
opinion of management, reflect all adjustments, which include only
normal recurring adjustments, necessary to present fairly our
financial position as of September 30, 2015, and our results
of operations for the three and nine months ended
September 30, 2015 and 2014, and cash flows for the nine
months ended September 30, 2015 and 2014. The financial data
and the other financial information disclosed in these notes to the
financial statements related to the three month periods and nine
month periods, are also unaudited. The results of operations for
the three months ended September 30, 2015, are not necessarily
indicative of the results to be expected for the year ending
December 31, 2015, or for any other future annual or interim
period. The condensed balance sheet as of December 31, 2014
included herein was derived from the audited financial statements
as of that date. These financial statements should be read in
conjunction with our audited financial statements included in our
form 10-K, filed with the SEC.
Reverse Stock Split
In June 2014, our board of directors and our stockholders approved
an amendment to our amended and restated certificate of
incorporation to effect a reverse split of shares of our common
stock on a 1-for-2.56437 basis (the Reverse Stock Split). The par
values and the authorized shares of the common and convertible
preferred stock were not adjusted as a result of the Reverse Stock
Split. All issued and outstanding common stock, convertible
preferred stock, options for common stock, warrants for common and
preferred stock, and per share amounts contained in the financial
statements have been retroactively adjusted to reflect this Reverse
Stock Split for all periods presented. The Reverse Stock Split was
made effective on June 11, 2014.
Use of Estimates
The preparation of the financial statements in accordance with U.S.
GAAP requires management to make certain estimates and judgments
that affect the reported amounts of assets, liabilities, and
expenses. Actual results could differ from those estimates.
We estimate our clinical trial expense accrual for a given period
based on the number of patients enrolled at each site and the
length of time each patient has been in the trial, less amounts
previously billed, plus any ancillary clinical trial expenses that
have been incurred but not yet recorded.
We measure and recognize compensation expense for all stock options
granted to our employees and directors, based on the estimated fair
value of the award on the grant date. We use the Black-Scholes
valuation model to estimate the fair value of stock option awards.
The fair value is recognized as expense, net of estimated
forfeitures, over the requisite service period, which is generally
the vesting period of the respective award, on a straight-line
basis. We believe that the fair value of stock options granted to
non-employees is more reliably measured than the fair value of the
services received. As such, the fair value of the unvested portion
of the options granted to non-employees is re-measured each period.
The resulting increase in value, if any, is recognized as expense
during the period the related services are rendered using the
accelerated method. The determination of the grant-date fair value
of options using an option-pricing model is affected by our
estimated common stock fair value, as well as assumptions regarding
a number of other complex and subjective variables.
Cash, Cash Equivalents and Short-Term Investments
Our cash equivalents consist of highly liquid investments with
maturities of 90 days or less at the date of purchase. Our
marketable debt and equity securities have been classified and
accounted for as available-for-sale. We determine the appropriate
classification of our investments at the time of purchase and
reevaluate the designations at each balance sheet date. We invest
in highly-rated securities, and our investment policy limits the
amount of credit exposure to any one issuer, industry group and
currency. The policy requires investments to be investment grade,
with the primary objective of minimizing the potential risk of
principal loss and providing liquidity of investments sufficient to
meet our operating and capital spending requirements and debt
repayments. No security in our portfolio shall have a maturity date
greater than 12 months at the time of purchase.
We classify our marketable securities as either short-term or
long-term based on each instrument’s underlying contractual
maturity date and as to whether and when we intend to sell a
particular security prior to its maturity date. Marketable
securities with maturities greater than 90 days at the date of
purchase and 12 months or less remaining at the balance sheet date
will be classified as short-term. Our marketable securities are
carried at fair value, with the unrealized gains and losses, net of
taxes, reported in accumulated other comprehensive loss as a
component of stockholders’ equity. Fair values are determined
for each individual security in the investment portfolio.
Interest income from our investment portfolio is recorded in
interest/other income and is presented net of any discount
accretion or premium amortization. Realized gains and losses on the
sale of securities are determined by specific identification of
each security’s cost basis. We may sell certain of our
marketable securities prior to their stated maturities for
strategic reasons including, but not limited to, anticipation of
credit deterioration and liquidity and duration management.
We continually review our available for sale securities to
determine whether a decline in fair value below the carrying value
is other than temporary. When evaluating an investment for
other-than-temporary impairment, we review factors such as the
length of time and extent to which fair value has been below its
cost basis, the financial condition of the issuer and any changes
thereto, and our intent to sell, or whether it is more likely than
not it will be required to sell the investment before recovery of
the investment’s cost basis. Once a decline in fair value is
determined to be other than temporary, an impairment charge is
recorded and a new cost basis in the investment is established. If
we do not intend to sell the debt security, but it is probable that
we will not collect all amounts due, then only the impairment due
to the credit risk would be recognized in earnings and the
remaining amount of the impairment would be recognized in
accumulated other comprehensive loss within stockholders’
equity.
We place our cash with institutions with high credit quality.
However, at certain times such cash may be in excess of Federal
Deposit Insurance Corporation and Securities Investor Protection
Corporation insurance limits. The carrying amount of cash
approximates fair value.
The following is a summary of cash, cash equivalents and short-term
investments (in thousands):
Amortized Cost Gross Gross
Estimated Fair
September 30, 2015
Cash and money market funds $ 59,371 $
— $
— $ 59,371
Corporate bonds 80,234 11 (29 ) 80,216
Commercial paper 27,731 18
— 27,749
Government securities 29,802 4 (1 ) 29,805
Asset backed securities 9,804
— (2 ) 9,802
Total financial assets $ 206,942 $ 33 $ (32 ) $ 206,943
Reported As:
Cash and cash equivalents $ 64,347
Short-term investments $ 142,596
$ 206,943
Amortized Cost Gross Gross
Estimated Fair
December 31, 2014
Cash and money market funds $ 36,534 $
— $
— $ 36,534
Corporate bonds 53,679
— (43 ) 53,636
Commercial paper 7,686 13
— 7,699
Government securities 4,411
—
— 4,411
Total financial assets $ 102,310 $ 13 $ (43 ) $ 102,280
Reported As:
Cash and cash equivalents $ 47,402
Short-term investments $ 54,878
$ 102,280
For the nine months ended September 30, 2015 and 2014, there
were no significant realized gains or losses on the
available-for-sale securities. All available-for-sale marketable
securities held at September 30, 2015 and December 31,
2014 had maturity dates less than one year. Unrealized losses are
recognized when a decline in fair value is determined to be
other-than-temporary. As of September 30, 2015 and
December 31, 2014, no investment was in a continuous
unrealized loss position for more than one year, the unrealized
losses were not due to changes in credit risk, and we believe that
it is more likely than not that the investments will be held to
maturity or a forecasted recovery of fair value.
Restricted Cash
On November 22, 2013, we executed an agreement to pledge,
assign, transfer, and grant a security interest to J.P. Morgan Bank
to secure the payment and performance of our credit card program.
Pursuant to the terms of the agreement, we have agreed to maintain
funds in a restricted cash account to support the credit limit of
the program, given we are a pre-revenue company. As of
September 30, 2015, the total balance in the restricted cash
account is $500,000, and we have earned approximately $1,000 in
interest income since inception of the account.
In April 2015, we entered into a lease agreement with Park Place
Realty Holding Company, Inc. (Park Place) for the lease of 37,874
square feet of office space to house our executive and commercial
offices in San Mateo, California. Under the terms of the lease, we
were required to provide Park Place with a letter of credit in the
amount of $1.5 million as security for the tenant improvements that
Park Place is making to the leased premises. The letter of credit
is drawn against Silicon Valley Bank. Pursuant to the terms of the
letter of credit agreement, we have agreed to maintain $1.5 million
in a restricted cash account to support the credit limit of the
letter of credit program.
Fair Value Measurements
ASC 820, Fair
Value Measurement
Financial assets and liabilities that have recurring fair value
measurements are shown below (in thousands):
Fair Value Measurements at
Quoted Prices in Significant Significant
Description Total Level 1 Level 2 Level 3
Financial Assets:
Money market funds $ 34,432 $ 34,432 $
— $
—
Corporate bonds 80,216
— 80,216
—
Commercial paper 27,749
— 27,749
—
Government securities 29,805
— 29,805
—
Asset-backed securities 9,802
— 9,802
—
Total financial assets $ 182,004 $ 34,432 $ 147,572 $
—
Fair Value Measurements at
Quoted Prices in Significant Significant
Description Total Level 1 Level 2 Level 3
Financial Assets:
Money market funds $ 22,142 $ 22,142 $
— $
—
Corporate bonds 53,636
— 53,636 $
—
Commercial paper 7,699
— 7,699
—
Government securities 4,411
— 4,411
—
Total financial assets $ 87,888 $ 22,142 $ 65,746 $
—
Level 2 available-for-sale securities primarily consisted of:
(i) bonds and notes issued by the United States government and
its agencies, domestic and foreign corporations and foreign
governments; (ii) preferred securities issued by domestic and
foreign corporations; and (iii) asset-backed securities issued
by domestic corporations. The estimated fair values of these
securities are determined using various valuation techniques that
incorporate standard observable inputs and assumptions such as
benchmark yields, reported trades, broker/dealer quotes, issuer
spreads, benchmark securities, bids/offers and other pertinent
reference data.
We believe the recorded values of cash and cash equivalents, other
current assets, accounts payable, and accrued expenses approximate
fair value because of the short maturity of these financial
instruments.
Income Taxes
Income taxes are computed using the asset and liability method, and
current income taxes are recorded based on amounts refundable or
payable in the current year. Deferred income taxes are recorded
based on the estimated future tax effects of loss carryforwards and
temporary differences between financial statement carrying amounts
of existing assets and liabilities and their respective tax basis.
Deferred tax assets and liabilities are measured using enacted tax
rates that are expected to apply to taxable income in the years in
which we expect those carryforwards and temporary differences to be
recovered or settled. Management regularly evaluates the future
realization of deferred tax assets and provides a valuation
allowance, if considered necessary, based on such evaluation. As
part of the evaluation, management has evaluated taxable income in
carryback years, future reversals of taxable temporary differences,
feasible tax planning strategies, and future expectations of
income. We continue to record a valuation allowance for the full
amount of deferred tax assets, which would otherwise be recorded
for tax benefits relating to the operating loss and tax credit
carryforwards, as realization of such deferred tax assets cannot be
determined to be more likely than not.
The Company recognizes uncertain tax positions when it is
more-likely-than-not, based on the technical merits, that the
position will not be sustained upon examination. At
September 30, 2015, the Company had no uncertain tax
positions.
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in equity of a
business enterprise during a period from transactions and other
events and circumstances from non-owner sources. For the three
months and nine months ended September 30, 2015, we had
short-term investments that included unrealized gains and losses,
which were reported in other comprehensive loss. For the three and
nine months ended September 30, 2014, net loss equaled
comprehensive loss.
Net Loss per Common Share Attributable to Common
Shareholders
Basic net loss per share attributable to common shareholders is
calculated by dividing the net loss attributable to common
shareholders by the weighted-average number of common shares
outstanding during the period without consideration for common
stock equivalents. Diluted net loss per share of common stock is
the same as basic net loss per share of common stock, since the
effects of potentially dilutive securities are antidilutive. The
net loss per share of common stock attributable to common
shareholders was computed using the two-class method required for
participating securities. Due to our net loss, there was no impact
on the earnings per share calculation in applying the two-class
method since the participating securities had no legal requirement
to share in any losses.
The following outstanding shares of common stock equivalents were
excluded from the computations of diluted net loss per common share
attributable to common shareholders for the periods presented as
the effect of including such securities would be antidilutive:
Nine Months Ended
2015 2014
Restricted stock units 65,657
—
Options to purchase common stock 5,612,343 4,694,227
5,678,000 4,694,227
Recent Accounting Pronouncements
In August 2015, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) 2015-15, Interest – Imputation
of Interest (Subtopic 835-30): Presentation and Subsequent
Measurement of Debt Issuance Costs Associated with Line-of-Credit
Arrangements. Interest-Imputation of
Interest (Subtopic 835-30): Simplifying the Presentation of Debt
Issuance Costs,
In May 2015, the FASB issued ASU No. 2015-07 , Fair Value
Measurement (Topic 820): Disclosures for Investments in Certain
Entities That Calculate Net Asset Value per Share (or Its
Equivalent).
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial
Statements—Going Concern: Disclosure of Uncertainties about
an Entity’s Ability to Continue as a Going Concern
In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with
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